Jim Dahle, editor of "The White Coat Investor," has written an excellent article about Fidelity's new "no expense ratio" funds and whether Vanguard investors should move to Fidelity or Schwab. The bottom line:

If your money is already at Fidelity or Schwab and you have a simple portfolio, go ahead and use their index funds guilt-free, especially if you’re in a tax-protected account. But if your money is at Vanguard like mine, there is absolutely NO reason to switch based on trivial differences in expense ratio. And you certainly don’t want to pay any capital gains taxes to switch one way or the other. The reason that Vanguard is the biggest mutual fund company in the world is that they’ve earned the trust of millions of investors by doing the right thing over and over and over again. Are they perfect? Not even close, but ownership matters, and in the case of Vanguard, you’re the owner. Show a little loyalty to your own company. They’re still doing the right thing.

Or is that a form of brand loyalty/anchoring bias that behavioral economics has shown makes people more willing to shell out $ unnecessarily? Not saying everyone should dump their current funds immediately but don't just say stuck with Vanguard just cause...

-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- |
-- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

There's honestly a lot of slack when it comes to expense ratios and investment choice. As long as you're broadly diversified, you own enough stock, and have solidly low expense ratios, then your actual investment choices aren't particularly important. Both Vanguard, Schwab, or Fidelity are good enough to make your investment and retirement plan work. Eating out one fewer time a week will make more of a difference by an order of magnitude or two, depending on how much you have saved at the moment. The difference between success and failure is more fundamental, at the behavioral level.

He's so right. I'm almost afraid that this zero expense ratio thing might be a bait and switch.

I don’t think it’s bait and switch. The funds pAy for themselves with securities lending rather than a management fee. They are very upfront about this. The downside is that the fund is taking a small amount of risk on your account to pay themselves. It’s essentially a variable ER with an incentive for the fund to take on some riskier counterparties than the regular funds might do.

People have been using this strawman a lot, but they never cite who in the present discussions actually said it. I at least have pointed out on numerous occasions that total cost is a better metric: tracking error and tax efficiency.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

He's so right. I'm almost afraid that this zero expense ratio thing might be a bait and switch.

I don’t think it’s bait and switch. The funds pAy for themselves with securities lending rather than a management fee. They are very upfront about this. The downside is that the fund is taking a small amount of risk on your account to pay themselves. It’s essentially a variable ER with an incentive for the fund to take on some riskier counterparties than the regular funds might do.

Actually they've pledged (ok, not pledged) the opposite, that in fact they won't skim the securities revenue at all:

this article wrote:But Fidelity pushed back on the talk of revenue from securities lending. "Fidelity's securities lending program is designed to benefit fund shareholders," the company said in a statement. "Fidelity is not receiving any revenue from the Fidelity ZERO Index funds for securities lending. Nor is Fidelity currently receiving any portion of the income that is generated from securities lent out."

Though I do note that they carefully used present participle and the statement was not exactly made on a forward-looking basis, it's still something.

Savings $400 annually on a million dollar position in VTSAX seems to be right on the edge between maybe making the change and not. There are probably easier ways for most with that large of a position to make/save $400 than by switching from Vanguard to Fidelity.

I have had an S&P 500 index fund in my 457 plan with a .003% ER, which is essentially zero. So this isn't too exciting for me.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

People have been using this strawman a lot, but they never cite who in the present discussions actually said it. I at least have pointed out on numerous occasions that total cost is a better metric: tracking error and tax efficiency.

I would think that total return would be a better metric than total cost, recognizing that it means using past results to project future performance. And total cost can be an elusive number.

If Vanguard went to zero ER, we'd all be celebrating. I'm glad to have options and will use my brain to decide where to put my money. Right now, I am doing what I always do: Don't just do something, stand there!

Probably some of the comments are justified - there would be a lot more enthusiasm if Vanguard had done this. But many of us also invest in very expensive active funds so tiny differences in expenses on index funds don't matter much at the relatively modest asset levels we have invested.

I think it's the ownership style of Vanguard that keeps it more attractive than other companies. We technically own Vanguard because of the way it's structured. Fidelity isn't held to the same standard or has a similar structure.

“Life is really simple, but we insist on making it complicated.” -- Confucius

+1 If you said someone relatively well known in investing came out with this today. I would have said it came from American funds or Eddie Jones. Just because its VG doesn't mean you don't have to be intellectually honest about cost.

I like how Bogleheads philosophy has been "all things equal, keep your expense ratios as low as possible because that's the only thing you can control and best predictor of success, it's just math!"

Then a non-Vanguard company comes out with lower fees and the forums are now full of "well actually it doesn't matter as much as you think it might..." posts.

Time to edit the wiki and reprint the books to add *unless it's not Vanguard to the costs section.

This is an appealing theory, but what you'll actually find are people saying "all other things are not actually equal".

TBH, if its not cost, I don't see a reason to invest in Vanguard over Fidelity right now. No minimums at Fidelity and Schwab are huge, especially for an average net worth person. Even for me, after I max my 401k and IRA it would take me about a year to save up the Admiral share minimum in a taxable account. I have a Vanguard taxable account with some ETFs, a fidelity 401k and some schwab accounts. The order by level of support that I have observed is Fidelity, Schwab, then Vanguard. Vanguard's lower trading fees if you have a lot of money with them are great.

I think it's the ownership style of Vanguard that keeps it more attractive than other companies. We technically own Vanguard because of the way it's structured. Fidelity isn't held to the same standard or has a similar structure.

If we technically own Vanguard, how come we can't get Vanguard to do what we want it to do? Because we're owners only in a theoretical sense. My credit union also tells me I'm technically an owner, and it means a little more in that environment because I get to vote for the board members.

I feel like buying a few shares of Schwab stock so I can say that I technically own Schwab, too.

I think it's the ownership style of Vanguard that keeps it more attractive than other companies. We technically own Vanguard because of the way it's structured. Fidelity isn't held to the same standard or has a similar structure.

If we technically own Vanguard, how come we can't get Vanguard to do what we want it to do? Because we're owners only in a theoretical sense. My credit union also tells me I'm technically an owner, and it means a little more in that environment because I get to vote for the board members.

I feel like buying a few shares of Schwab stock so I can say that I technically own Schwab, too.

Saying I own Vanguard is like saying Vanguard owns Apple. Its technically true, but when most people think of 'ownership' they equate it with control and I haven't seen any concrete example of how Vanguard controls Apple or we the Vanguard fund holders control Vanguard.

I think it's the ownership style of Vanguard that keeps it more attractive than other companies. We technically own Vanguard because of the way it's structured. Fidelity isn't held to the same standard or has a similar structure.

If we technically own Vanguard, how come we can't get Vanguard to do what we want it to do? Because we're owners only in a theoretical sense. My credit union also tells me I'm technically an owner, and it means a little more in that environment because I get to vote for the board members.

And if you have shares of a Vanguard fund, you get to vote Vanguard-wide proxies as well as proxies for the individual funds.

I'm invested through Fidelity and applaud the reduction. Of course I don't see a big difference between 0.04% and zero; at least not compared to one of my slice and dice funds (International REIT) that is 0.48%.

Anyway, changing would be relatively easy but I'm not making a sudden effort. I might look harder when I get a chance. I think that is what most of the "no big deal" comments refer to. If I were with Vanguard or Schwab I would certainly not bother making such a move.

I just checked and moving the part of my portfolio in total US and total International to these funds would move my blended ER from .1528 to .1480%. Changing the component that is already near zero does not change my overall costs much. Now a 0% target date fund would be a big deal.

I don't obsess about expense ratios, though I do pay attention to them. But then, I don't happen to own any Vanguard funds at the present either. I've gone out on enough investment limbs in the past that the perpetual discussions on "how do I get Admiral shares" don't even get a chuckle anymore. For my index funds, good enough is good enough.

Savings $400 annually on a million dollar position in VTSAX seems to be right on the edge between maybe making the change and not. There are probably easier ways for most with that large of a position to make/save $400 than by switching from Vanguard to Fidelity.

I have had an S&P 500 index fund in my 457 plan with a .003% ER, which is essentially zero. So this isn't too exciting for me.

Jack Bogle wrote: The grim irony of investing, then, is that we investors as a group not only don't get what we pay for, we get precisely what we don't pay for. So if we pay for nothing, we get everything.

Last edited by Leif on Tue Aug 07, 2018 12:16 am, edited 1 time in total.

Bottom line: STOP investing in vanguard going forward. Instead use the Fido funds. For those deep in accumulation phase this is god sent opportunity that you should grab with both hands. For mid age folks like me who cough up multiple thousands of dollars in fees to vanguard every year for our existing positions we’re out of luck. Trapped between having to pay six figures in fees to vanguard for the remainder of our investment lives or having to pay six figures in LTCG to Uncle Sam. Pick your poison.

Jim Dahle, editor of "The White Coat Investor," has written an excellent article about Fidelity's new "no expense ratio" funds and whether Vanguard investors should move to Fidelity or Schwab. The bottom line:

If your money is already at Fidelity or Schwab and you have a simple portfolio, go ahead and use their index funds guilt-free, especially if you’re in a tax-protected account. But if your money is at Vanguard like mine, there is absolutely NO reason to switch based on trivial differences in expense ratio. And you certainly don’t want to pay any capital gains taxes to switch one way or the other. The reason that Vanguard is the biggest mutual fund company in the world is that they’ve earned the trust of millions of investors by doing the right thing over and over and over again. Are they perfect? Not even close, but ownership matters, and in the case of Vanguard, you’re the owner. Show a little loyalty to your own company. They’re still doing the right thing.

I think it's the ownership style of Vanguard that keeps it more attractive than other companies. We technically own Vanguard because of the way it's structured. Fidelity isn't held to the same standard or has a similar structure.

If we technically own Vanguard, how come we can't get Vanguard to do what we want it to do? Because we're owners only in a theoretical sense. My credit union also tells me I'm technically an owner, and it means a little more in that environment because I get to vote for the board members.

I feel like buying a few shares of Schwab stock so I can say that I technically own Schwab, too.

I own shares of 22 different companies individually and thousands through the mutual fund structure. I have yet to be flown to a company headquarters and had a CEO personally ask me about what I thought about the company. The closest I got to individual attention was a mailing from a company asking me not to vote against the Executive Compensation Plan. I guess having a net worth north of $200 million wasn't enough of the CEO. I made piggy noises "oink" "oink" while I threw the letter in the trash. I voted "No" and if there was a spot for "Hell No" I would have voted that.

Bottom line: STOP investing in vanguard going forward. Instead use the Fido funds. For those deep in accumulation phase this is god sent opportunity that you should grab with both hands. For mid age folks like me who cough up multiple thousands of dollars in fees to vanguard every year for our existing positions we’re out of luck. Trapped between having to pay six figures in fees to vanguard for the remainder of our investment lives or having to pay six figures in LTCG to Uncle Sam. Pick your poison.

I am afraid you have the correct strategy completely backwards.

For those with taxable positions in Vanguard they should be content to stay put because the expected year-to-year total cost of holding the Vanguard funds is lower than holding Fidelity; Vanguard funds are routinely much more tax-efficient than their Fidelity competitors, more than any present difference in expense ratio.

Conversely, those nearing retirement with significant IRA investments may be well-advised to switch to the Fido funds because there is no cost to switch and the cost savings will be significant on their accumulated savings.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

I disagree. Fidelity spartan funds have been tax efficient for years. I have no reason and no proof to believe that these funds will be less efficient than vanguard. Hence all new money being invested (irrespective of taxable or tax sheltered) should go to these Fido funds. Period.

Bottom line: STOP investing in vanguard going forward. Instead use the Fido funds. For those deep in accumulation phase this is god sent opportunity that you should grab with both hands. For mid age folks like me who cough up multiple thousands of dollars in fees to vanguard every year for our existing positions we’re out of luck. Trapped between having to pay six figures in fees to vanguard for the remainder of our investment lives or having to pay six figures in LTCG to Uncle Sam. Pick your poison.

I am afraid you have the correct strategy completely backwards.

For those with taxable positions in Vanguard they should be content to stay put because the expected year-to-year total cost of holding the Vanguard funds is lower than holding Fidelity; Vanguard funds are routinely much more tax-efficient than their Fidelity competitors, more than any present difference in expense ratio.

Conversely, those nearing retirement with significant IRA investments may be well-advised to switch to the Fido funds because there is no cost to switch and the cost savings will be significant on their accumulated savings.

I’m afraid not. Do you have evidence for your assertion? By the way I never said they weren’t tax efficient — they are! But the question is tax efficiency relative to Vanguard. Fidelity Spartan funds regularly pay out capital gains distributions. To confirm this go to the fund page and look at the “distributions and fees” tab. Vanguard funds almost never pay out capital gains.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

I disagree. Fidelity spartan funds have been tax efficient for years. I have no reason and no proof to believe that these funds will be less efficient than vanguard. Hence all new money being invested (irrespective of taxable or tax sheltered) should go to these Fido funds. Period.

The “Tax Efficiency” section of the WCI blog post (that this thread is about) seems to show that after tax results are better than those of Fido and Schwab.

Savings $400 annually on a million dollar position in VTSAX seems to be right on the edge between maybe making the change and not. There are probably easier ways for most with that large of a position to make/save $400 than by switching from Vanguard to Fidelity.

I have had an S&P 500 index fund in my 457 plan with a .003% ER, which is essentially zero. So this isn't too exciting for me.

How about saving $400 and getting better customer service?

I don't need customer service. I do everything online, and it's very easy to use Vanguard to do what I do. On the rare occasion that I've needed to contact Vanguard's staff for some reason, they've been fine.

So no, I'm not motivated enough to make the switch. Besides, if you read Jim Dahle's blog post, you'll see that despite 1-3 basis point higher ERs, Vanguard's index funds have actually beaten Schwab's and Fidelity's returns in recent years. So that $400 savings may be non-existent after all.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

I don't need customer service. I do everything online, and it's very easy to use Vanguard to do what I do. On the rare occasion that I've needed to contact Vanguard's staff for some reason, they've been fine.

That is my experience as well. I have never called VG or Fidelity in over 20 years of account ownership. I once walked into a Fidelity Office. Don’t exactly recall why. I suspect they both will generally offer acceptable service if I need it.

My gut feel is that these new funds are a gimmick. The Johnsons still want to make money when I invest money with Fidelity. I am okay with that, but I credit Vanguard with driving the costs down and will keep the bulk of our investments there. No point in paying capital gains to switch and no point in adding complexity (additional fund) for new investments, especially considering the data in the WCI post.

It actually has been fun to watch this thread. Let's face it, there is brand loyalty involved here. A bit of the Chevy vs. Ford, Yankees vs. Red Sox, country hicks vs. the city slickers. Haven't had so much fun since seeing Larry Swedroe vs. Rick Ferri.

Vanguard fans, I don't see big reasons to switch. If you are happy with what you have, just stick with it. Pretty sure that Vanguard will respond here. But there is a lot of competition out there: Blackrock and Schwab come to mind. Vanguard will always be very competitive.

I am a Fidelity fan and own their funds. Also own Vanguard funds and ETFs too.

Don't obsess about expense ratios that favor any company other than Vanguard? But obsess about expense ratios when Vanguard has the lowest?

Does show a little loyalty to your own company apply to every company? Or only Vanguard?

I strongly prefer doing business with companies I trust. Vanguard has earned my trust over years of experience. Fidelity has not (issues of security, honesty, putting their interests over mine). I've posted some of the details previously. In the past Vanguard also had the lowest costs. If that has changed, it is not nearly enough to motivate me to move. Vanguard is not-for-profit. If Vanguard charges a certain percentage, then there is a reason for it. By staying with Vanguard when a for-profit company charges less, either I'm paying for service and security levels that the for-profit company company is skimping on, or else there is some inefficiency at Vanguard that the for-profit company does not suffer from. I'll take my chances that Vanguard knows what it's doing and that I'm paying a reasonable fee for the overall service and security I'm getting.

A good argument for moving money to Fidelity is to force Vanguard (and other firms) to also lower rates (I assume Fido never would have lowered their rates if they didn't have to compete with Vanguard's low rates in the first place).

Keep competition as fierce as possible. Vote with your assets. Reward the firm that offers the best deal. The others will eventually get the message and the long-term effect will be lower rates across the board for all of us.

The argument reminds me of the actions of my employer in the 80's. Digital Equipment Corp (DEC) put IBM on its heels by miniaturizing the computer. From a room full of computer to a cabinet to a refrigerator. Going smaller propelled DEC to be the 2nd biggest computer company in the world. Then they decided that there wasn't a reason to get any smaller. They released the Robin, which was their shot at a desktop but it was not well received and their focus only on scientists missed the real market. Going smaller was no longer a driving force. And then the little guys, who DEC had considered buying with spare change overtook DEC and soon after, those little guys became the suppliers that mattered.

I see this ER drive to be the same. The investment houses need to figure out how to continue to drive costs down. They need to make customer service better and I'd even put out there that they're going to need to start paying bank-like interest on top of investment returns.

Yes, I agree that the discount guys have very low cost. But thinking you've crossed the finish line and now it's just time to stop and rest is the thinking that brought DEC to its grave.

Nothing wrong with obsession, as long as you keep your rational head about it (Yeah, I know we are not rational, but we can still think about it reasonably! .
I think this debate between Vanguard and Fidelity is a distraction from the primary problem--fee-only financial advisors. I have an obsession with their AUM expense which is now accepted as a replacement for commissions. Unfortunately, many of my friends, relatives, and colleagues ask for help and I obsess over recommending them to hire a so-called fee only FA. They need help but lack the confidence of a DIY. I know, I know it's not my problem but I hate to see people get charged AUMs even if all of their money is in a free Fidelity fund. And ER is still an ER.

Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."